Rental growth for multi-let industrial assets is showing signs of “cooling”, according to the latest research from Gerald Eve.
Inner London rental growth hit 10% in 2022 and the North West also enjoyed double-digit estimated rental value (ERV) growth last year for the first time on record, but Gerald Eve’s figures show that while this trend continued into 2023, annualised market rental growth is now slowing to high single digits across the UK.
The multi-let default rate hit 4.3% last year – the highest since 2014 – and Gerald Eve expects defaults to increase again in 2023, although the numbers will likely remain below financial crisis levels.
Josh Pater, partner at Gerald Eve, said: “Multi-let is a fundamentally robust property segment, underpinned by a diverse occupier base and lack of realisable new supply, placing it in a strong position to weather the current economic challenges. While inflation rates may be falling, progress has been sluggish and occupier cost pressures have continued to ascend, which include strong passing rental growth while rental reversion is so high.
“We’ve witnessed the effects of this in logistics assets in the form of reduced take-up and increased sub-letting, which we expect will trickle down into the smaller segment. Having said that, multi-let is its own market, with its own unique drivers, and we expect market rental growth to remain positive. As we can see from deals completed by Gerald Eve in Q2, rental growth has been helped in part by increased flexibility from landlords.”
Although the all-in cost of debt has more than doubled thanks to dramatic increases in SONIA, the company continues to be “bullish” about the outlook for investment activity in the sector.
Nick Ogden, partner at Gerald Eve, said: “However, concerns around the increasingly hawkish outlook for interest rates have impacted investor sentiment, pushing debt financing out of reach for most across the broader markets. But market trading volumes remain low and prices being paid are relatively strong, having improved through 2023.
“Low market trading volumes is linked to a lack of investible stock in the market, with a significant weight of money targeting UK commercial property, with industrial still the most prudent option to place capital. While current yields may look low in the context of all-in debt costs, many active investors are buying all-equity and will look beyond current interest rate volatility in anticipation of rates beginning to fall in 2024. In many cases, prices are at or below land plus replacement cost levels, which makes sense on the buy-side longer term.”
